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The current U.S. economic expansion, as measured by GDP growth, now stands as the longest in our nation’s history. The third quarter saw a continuation of that expansion, but also brought with it cues that it may finally be slowing: manufacturing gave mixed signals both here and abroad, and the Federal Reserve, the European Central Bank, and the People’s Bank of China took steps to stimulate contracting economies. The summer featured many attention-grabbing headlines, from the abrupt devaluation of the Chinese yuan to shifting Treasury yields, as well as the ongoing tumultuous sagas of the U.S. – China trade talks and a seemingly never-ending Brexit process. Yet through it all, Wall Street’s confidence remained strong, pushing the S&P even higher.

 

ECONOMIC CONDITIONS:

Signs of slowing but still positive economic signals coupled with a supportive policy mix and the prospect of an extended cycle underpin our generally positive view.

GDP: Comparing the Bureau of Economic Analysis’ latest Q2 GDP estimate of 2.0% to the Federal Reserve Bank of Atlanta’s GDPNow estimate for Q3 of 1.76%, we can see a forecasted slowing of the U.S. economy.

According to the Institute for Supply Management, U.S. manufacturing activity slowed in both August and September, with the September slowdown the sharpest monthly contraction seen since June 2009. [1,2]

UNEMPLOYMENT: The Department of Labor reported 130,000 net new workers in August, a drop from July creation levels that reduced 2019’s monthly average to 158,000. Unemployment stayed flat from July to August at 3.7%.

The U-6 rate, which counts the underemployed and unemployed, started at 7.0% in July and rose to 7.2% a month later.

HOUSING: Home buying saw an uptick in Q3 while YOY home value appreciation slowed. The National Association of Realtors noted a 2.5% rise in existing home sales in July and
a 1.3% gain for August. Its pending home sales index, down 2.5% in July, reversed course and rose 1.6% a month later.

New home sales represent only a sliver of the residential real estate market by comparison, but it is worth noting that Census Bureau data showed new home buying rebounding in August after a drop in July.
The 20-city S&P/Case-Shiller home price index saw a 2.0% annualized increase through July, then went flat for that month. [3]

INTERNATIONAL: Numbers indicate that by September, the manufacturing sectors of the Euro area, the United Kingdom, Russia, Mexico, Germany, and Japan are officially shrinking rather than growing. Despite the slowdown of these major world economies’ factory activity, the JPMorgan Global Manufacturing PMI rose in August and in September. [4,5]

In efforts to stimulate the Euro-area economy, the European Central Bank (ECB) took its overnight deposit rate to a record low of -0.5% and announced another round of monetary stimulus: beginning in November, the ECB is to buy €20 billion in bonds per month.

China’s industrial output faltered in the quarter, hitting 17-year lows in July and August. Year-over-year retail sales had grown by 7.5% through August, also representing a decline. The People’s Bank of China enacted some strategies in Q3 in response to this disappointing data. Besides devaluing the yuan, China reduced capital reserve requirements for its banks in the quarter and set new, pro-growth standards for commercial lending. [6]

The latest in the epic Brexit journey included new Prime Minister Boris Johnson attempting to suspend Parliament for several weeks preceding the scheduled October 31st departure from the European Union. This was ruled unconstitutional by the country’s highest court, and Johnson found himself refusing to resign amidst mounting pressure. A trade deal has yet to be reached with the E.U., yet Prime Minister Johnson maintains the Brexit deadline will be met. [7,8]

 

EQUITIES:

Developed International markets make the most gains after a long period of underperformance, valuations remain favorable relative to the U.S. with price-toearnings ratios registering 13.89 abroad and almost 17 in the U.S.

US: After an early August swoon, the S&P 500 recovered during September and managed a 1.70% gain by quarter end. Mid-caps were relatively flat on the quarter while small caps lost 2.40% as worries of slowing economic conditions weighed on investors.

The Dow Jones Industrial Average settled at 26,916 on the last trading day of the quarter; the Nasdaq Composite, at 7749.

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DEVELOPED INTERNATIONAL EQUITIES: In the big picture, developed international markets outgained the emerging ones. The MSCI EAFE index, a benchmark for developed equity markets in Europe and the Asia-Pacific region, improved 3.7% in the quarter. Germany’s DAX, 7.1%. France’s CAC 40 gained 6.5%, and Japan’s Nikkei 225 (1.0%).

EMERGING MARKETS: MSCI’s Emerging Markets index rose just 0.6%.9 Russia’s Micex benchmark led the way among notable indices, up 16.9% in Q3. Brazil’s Bovespa rose 7.2%; lesser Q3 gains were registered by Spain’s IBEX 35 (2.6%), Mexico’s Bolsa (1.1%), South Korea’s Kospi lost 0.9% for the quarter, and China’s Shanghai Composite fell 4.0%. [9]

 

FIXED INCOME:

Interest rates neared all-time lows in the U.S. and abroad, driven by dovish pivots by the Fed and the European Central Bank – resulting in yield curve inversion.

US: The Federal Reserve lowered the country’s short-term interest rate by a quarterpoint on September 18, to a range of 1.75% to 2.00%. On August 15, traders took note of another development: the yield of the 2-year Treasury bond exceeded the yield of the 10-year Treasury bond for the first time since 2007. In past years, this has sometimes signaled an oncoming interruption in U.S. economic expansion. Longer-term Treasuries commonly have higher yields than shorter-term Treasuries; when the opposite is true, it indicates that domestic and foreign investors have less optimism in their economic outlook. (Bond yields often fall when bond prices rise, and vice versa.) [10]

 

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DEVELOPED INTERNATIONAL FIXED INCOME: The ECB’s stimulation moves as mentioned above, particularly the anticipated monthly purchase of €20 billion in bonds, caused global yields to fall in general, and the Global Aggregate bond index rose another 3.05% for the quarter.

 

QUARTERLY FOCUS:

Inside the Longest Expansion in American History

Since 1926, the average expansion has lasted around 60 months in the United States.

As illustrated below, we are now approaching 123 months of this expansion. While the length of this recovery is setting records, the strength has been subdued. The average GDP recovery growth rate is 3.2%. In comparison, the current recovery has managed only 2% on average. On the flipside, average recessions lasted only about a fifth as long, ranging from the relatively short six-month recession in 1980 to the lengthier Great Depression, starting in 1929 and lasting a total of 43 months. The record-long expansion looks unlikely to morph into a deeper downturn any time soon, supported by healthy household spending, and central bank accommodation aimed at offsetting any trade shocks and a slowdown in manufacturing. Moreover, equity valuations, while not cheap, appear reasonable against a backdrop of low interest rates and an expected uptick in earnings growth.

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DPWM OUTLOOK:

Diverse Portfolios ‘Trump’ White House Residents

The inevitable frenzy surrounding the upcoming 2020 presidential election will undoubtedly cause investor concern around how portfolios will fare under a Republican or Democratic administration. We’d like to share the long-term perspective to ease these concerns. One of the most common misconceptions about politics and the market is that economic conditions and policies will be similar to historical conditions when the same party is voted into the White House. The president is only one factor of many that can influence the market, and signs point to other factors having stronger influence than our Commander in Chief. Macroeconomic factors such as interest rates, inflation, economic forecasting, changes in policy and wars all can impact the economy much faster than a new president attempting to send legislation through Congress. Rather than trying to time the market around an election or predict a new leader’s economic policy, a diversified portfolio can help you build long-term wealth regardless of which party is in the Oval Office. Stocks have historically done well in the long term with a mix of Democratic and Republican presidents (see chart on next page). Don’t let your perceptions overshadow sound investment strategy. Diversification is your most powerful tool.

Amid all the headlines, the impending election cycle, and signals of a slowdown, we remain near all-time highs on the major U.S. indices with reasonable valuations to boot. A resolution on the trade war coupled with moderate earnings growth could cause this year-end pessimism to give way to new highs on the averages. As we at DPWM stay on top of the current events and signals of a slowing expansion, we also stay the course with investment strategies proven to withstand political upheaval.

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CITATIONS:

1 – bloomberg.com/news/articles/2019-09-06/u-s-payrolls-rise-130-000-boosted-by-25-000-for-census-count [9/6/19]

2 – tradingeconomics.com/united-states/business-confidence [9/3/19]

3 – investing.com/economic-calendar [9/30/19]

4 – tradingeconomics.com/country-list/manufacturing-pmi [10/1/19]

5 – markiteconomics.com/Public/Home/PressRelease/6d5ffb41584d4c08a54706d85d3580b3 [10/1/19]

6 – cnn.com/2019/09/16/economy/china-economy-industrial-production/index.html [9/16/19]

7 – tinyurl.com/y69hktvl [9/12/19] 8 – tinyurl.com/y53dzoy5 [9/24/19]

9 – cnn.com/2019/09/16/economy/china-economy-industrial-production/index.html [9/16/19]

10 – bloomberg.com/graphics/2019-yield-curve-inversions/ [8/15/19]

11 – hartfordfunds.com/practice-mngt/client-conversations/10-things-you-should-know-about-politics-and-investing

Post Disclaimer

The information contained in this post is for general information purposes only. The information is provided by The Longest Expansion in History: Q3 2019 Commentary and while we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.

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